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OEMs In Aftermarket: Good, Bad And Ugly

As OEMS increase aftermarket penetration, stand-alone MRO providers must devise new strategies and customized service approaches to remain competitive.

As a new generation of commercial jets comes online, airframe, component and engine OEMs see greater revenue-generating opportunities in aftermarket support.

“Boeing, Airbus, Bombardier and Embraer now offer complete nose-to- tail, life-cycle engineering and maintenance on the aircraft they manufacture,” says Chris Doan, vice president of Cavok Group, a subsidiary of Oliver Wyman.

As Doan explains, small startup carriers have been heavily dependent on comprehensive support from OEMs, which have realized they could offer that level of support on a much broader scale. “For the OEMs, it improves customer service and provides a portal to additional profitability,” he says.

The most popular type of OEM airframe support is focused on components for large portions of the airframe—with the OEM retaining ownership of those components, says Doan. For the airline customer, the components remain off the books, with utilization as needed. “That is definitely the largest, most mature, and most widely used support product from the airframe OEMs,” he says. “It is also being applied to line-replaceable units (LRU)—hydraulic units, pumps, actuators and avionics boxes—which are frequently replaced and very conducive to arrangements of these kinds.”

Broader airframe OEM customer support, Doan points out, is in its early infancy. To illustrate, he cites a study carried out by Oliver Wyman, projecting the heavy airframe maintenance segment of the MRO market in 2016 to be worth approximately $16 billion. Of that, the airframe OEM share will be about 3%. “It’s just another step away from the time when airlines did everything in house, until they began to think about what they could do to reduce costs,” says Doan. “That led to outsourcing, which continues today.”

Wayne Plucker, global director, aerospace research at Frost & Sullivan, notes that component OEMs are also increasing their stake of the aftermarket. “Today, some component OEMs are deriving as much as 30% of their total sales from service revenue,” he says.

Plucker specifically cites rotable parts and component OEMs as among those making aftermarket inroads through parts-management agreements.

“They used to avoid that business because their traditional model was to build the components and then sell them to parts houses, which would make them available to independent and airline MROs,” Plucker notes. “But over time the parts and components OEMs have evolved into direct suppliers to the end users, now that they have convinced the MROs and airlines that they are competitive with parts houses on price and responsiveness.”

The competitive nature of new aircraft sales also factor in, says Plucker. “For airframe OEMs, margins are very thin, so it’s natural for them to look at other opportunities to increase their profitability.”

Plucker says that support packages such as Boeing’s GoldCare and Airbus’s Flight Hour Services have benefited from an important lesson learned. “The key to a better aftermarket support package for the airframe OEMs is to have their suppliers onboard, which was lacking in the past,” he explains. “For the Boeing 787 and the Airbus A350, the partnership that these OEMs have with their suppliers includes agreements to work [together],” so “airframe OEMs can go to their customers and say that the suppliers will meet price and availability guarantees.”

Jim Sokol, president of MRO services for Haeco Americas in Greensboro, North Carolina, sees more demand for total MRO enterprise solutions from the airframe OEMs, especially from low-cost carriers. “There is increasing interest in full turnkey MRO packages, and the competition to do this is definitely between the airframe OEMs and the independent MROs. I have seen this within the last few years, as airlines have asked us to offer more complex maintenance services,” he says.

Sokol argues that OEMs view modification work performed by MROs as “a lost opportunity,” which they are attempting to regain. That is one reason why intellectual property (IP) access remains what he calls “a significant competitive issue between MROs and OEMs. “We can get the IP, but there are very large costs associated with that.”

Mike Fleming, vice president of fleet services for Boeing Commercial Aviation Services, says the company is simply following an “evolutionary path” toward greater aftermarket services—largely prompted by some legacy carriers shrinking their in-house MRO capabilities and new-entrant carriers not wanting to establish them. “We experienced pull from these customers to provide more services that would help them operate our airplanes more efficiently and fill the engineering and maintenance spaces that our customers want to vacate or don’t want to establish,” he says.

Fleming reports that Boeing is providing a range of products and services under its GoldCare brand, up to and including a fully integrated engineering, maintenance, parts and fleet airworthiness management package.

At the same time, Fleming cites Boeing’s rotable parts pooling management as a leading support program that has evolved over the past decade. “We started with Boeing proprietary spares, then expanded into line-replaceable units, and large components from Boeing suppliers. We have continued to build upon these services over time,” he says.

To prepare for the 2018 entry into service of its E-Jet E2 regional airliners, Embraer is building upon its Total Support Package (TSP), a comprehensive maintenance support program for its current-production E-Jets. TSP includes material support, asset and repair management, logistics and engineering services and maintenance activities on a pay-by-the-hour approach, explains Johann Bordais, vice president, services and support for Embraer Commercial Aviation in Brazil.

“Most of our support solutions we are developing for the E-Jet E2 will have considerable commonality with the ones we deliver today,” says Bordais. “That will benefit those airlines which may operate a mixed E-Jet and E-Jet E2 fleet, or are transitioning from one to the other.”

Bordais adds that for the E-Jet E2 aftermarket, Embraer’s material services will encompass a broader scope of spare parts in its pool and collaborative inventory planning programs, and additional e-solutions for parts management improvement. For aircraft modifications, Embraer is instituting a faster reconfiguration process based on product structural and electrical provisions, and predefined configurations. “We are also introducing an enhanced, more integrated entry-into-service process, with a longer, more robust time frame, starting with a thorough customer needs assessment,” he reports. 

Embraer is developing a digital services platform, referred to as “Smart Integration.” Leveraging the Big Data concept, its use of onboard data—combined with off-aircraft information—will maximize aircraft availability, reduce maintenance costs and optimize fuel consumption. “It will generate operational intelligence to support the decision-making process on a daily and long-term basis,” says Bordais.

Component OEM BAE Systems Control and Avionics Solutions is—like the airframe and engine manufacturers it supplies—assuming a greater role in the maintenance business.

“We are broadening our support through programs involving used serviceable materials,” says Jeff Bartlett, director of aftermarket solutions for the Grapevine, Texas-based unit of BAE Systems. Parts pooling is also being considered.

“We see pooling arrangements as an opportunity because airlines have been hesitant about sharing inventory with other carriers, due to concerns about component histories,” he says. “An OEM-managed pool can assure users that all documentation is complete, including product upgrades and service bulletin work.”

For MROs, the competitive landscape is changing with greater OEM aftermarket involvement. As Johannes Bussmann, executive board chairman of Lufthansa Technik, notes, the entry into service of new-generation aircraft and engines is creating a new situation for the MRO market. “The new technologies are more reliable and complex, and IP rights management will play a different role in every industry, including aviation,” Bussmann stresses. “For an MRO to remain successful, it is essential to create its own, independent intellectual property as well as to collaborate with intellectual property holders. To do this, size and engineering capabilities play a much larger role today.”

In fact, Flightstar Aircraft Services Chief Operating Officer Tucker Morrison says airlines will want to keep the competitive dynamics of MRO as open as possible in order to source the best maintenance solution.

“The degree to which independent MROs can offer a customized program is a key differentiator that does not always dovetail with what the airframe OEMs are offering,” says Morrison. “While the main strength of an OEM is aircraft mass-production, the main strength of an independent MRO is to work with each airline customer, understand [its] maintenance needs and develop the best solutions over the life of the airplane.”

“Customers will dictate the kind of aftermarket support they want—solely from the OEM, an independent MRO or a hybrid OEM/independent MRO model,” says Rob Cords, president, StandardAero Airlines & Fleets. “If they collectively choose an ‘OEM only’ approach, then the industry will lose the vital capital investment, regional expertise and management focus that an independent MRO brings.”

Citing turbine engines, for which StandardAero is a major MRO provider, Cords says that new-engine buyers can obtain maintenance and fuel-burn guarantees, while dictating that a high-quality independent MRO shop perform the work. “OEMs are satisfied that they were able to make the new engine sale while leveraging a sound independent partner who is focused on making new investments in repair and performing work to the OEM’s standards,” he says.

As for mature engines, Cords says that “where the operating characteristics and maintenance costs are understood, customers will ensure their material pricing is portable to any MRO performing the work and not just the OEM.

“On late-stage products, customers will migrate to [MRO plans] where the OEM has established access to new and used-serviceable OEM parts, as well as an increasing number of OEM approved repairs—and sometimes performance upgrades,” he says.

Fleets in and near the mature stage may in fact represent a growing opportunity for engine OEMs. “I am noticing a trend among the engine OEMs to buy green time [life-remaining] engines for lease or sale, as well as engines for parting out,” says Amanda Gower, Southwest Airlines senior manager of the powerplant supply chain. She sees this happening with the CFM56-7, which powers Southwest’s 737 NGs. “For GE, I think their long-term strategy—8-10 years ahead—is to increase their presence in the CFM56-7 aftermarket by buying up used-serviceable material and whole engines, which will help to keep used material pricing closer to catalog list pricing.”

Gower adds that with engines staying on wing longer—going as many as 10 years between major maintenance events—the OEMs are being cut out of a lot of revenue. “They are looking for more ways to derive revenue over the engine’s life cycle,” she says.

Engine OEMs are, in fact, building on what is already a large share of aftermarket services. Leo Koppers, senior vice president of MRO services at MTU Maintenance Hanover, reports that their share is currently in the 50% range, depending on specific models. “Today, aftermarket contracts are increasingly being signed at the aircraft and/or engine point of sale. In addition, there is growing OEM coverage for existing engine models—for example, the V2500,” he says.

This, Koppers points out, represents an interesting new trend. “Whereas there is a plethora of offerings for mature and current-generation engines, provider choice for next-generation engines will be far more limited—at least for first-tier operators,” he notes. “With OEM market coverage up to 80% for such engines, and a typical ‘total care’ contract ranging from 10-20 years, no significant competition to OEMs can be expected within the first 10 years after entry into service.”

This, Koppers says, represents a “structural change in the engine MRO market landscape” as non-OEM MRO providers try to become “an integral part of the OEM-controlled network” in order to get some share of the work. “In general, service depth and the ability to provide work to third parties is being increasingly restricted, especially by growing IP protection for specific repair schemes,” he says. 

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